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Dynamic Oligopoly with Incomplete Information

Author(s)
Bonatti, Alessandro; Cisternas Leyton, Gonzalo Sebastian; Toikka, Juuso T
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Abstract
We consider learning and signalling in a dynamic Cournot oligopoly where firms have private information about their production costs and only observe the market price, which is subject to unobservable demand shocks. An equilibrium is Markov if play depends on the history only through the firms’ beliefs about costs and calendar time. We characterize symmetric linear Markov equilibria as solutions to a boundary value problem. In every such equilibrium, given a long enough horizon, play converges to the static complete information outcome for the realized costs, but each firm only learns its competitors’ average cost. The weights assigned to costs and beliefs under the equilibrium strategies are non-monotone over time. We explain this by decomposing incentives into signalling and learning, and discuss implications for prices, quantities, and welfare.
Date issued
2016-09
URI
http://hdl.handle.net/1721.1/114280
Department
Massachusetts Institute of Technology. Department of Economics; Sloan School of Management
Journal
Review of Economic Studies
Publisher
Oxford University Press
Citation
Bonatti, Alessandro, Gonzalo Cisternas, and Juuso Toikka. “Dynamic Oligopoly with Incomplete Information.” The Review of Economic Studies (September 16, 2016): rdw049.
Version: Author's final manuscript
ISSN
0034-6527
1467-937X

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